(Bloomberg)
Brent crude oil grabbed all the attention after spot prices hit $80 a barrel last week. And yet, almost unnoticed, a perhaps more important rally has occurred in the obscure world of forward prices, with some investors betting the “lower for longer” price mantra is all but over.
The five-year Brent oil forward price, which has been largely anchored in a tight $55-to-$60 a barrel range for the past year and a half, has jumped over the last month, outpacing the gains in spot prices. It closed at $63.50 on Friday.
“For the first time since December 2015, the back end of the curve has been leading the complex higher,” said Yasser Elguindi, a market strategist at Energy Aspects Ltd. in New York. “It seems that the investor community is finally calling into question the ‘lower for longer’ thesis.”
Bob Dudley, the chief executive of oil giant BP Plc, coined the “lower for longer” mantra in early 2015, warning of a protracted period of cheap crude. He later clarified that he meant “lower for longer, but not for ever.”
More to Run
While spot prices fluctuate wildly, the five-year forward usually trades in a narrower range, anchored by longer views about future supply and demand. Over the past three years, long-dated prices had been weighed down by the belief the growth in U.S. shale production, combined with the adoption of electric vehicles, would keep prices under control.
Investors are now questioning that hypothesis, pushing up forward prices. Over the past month, Brent five-year forward futures gained 11 percent, compared with a 6.8 percent increase in futures for immediate delivery.
“We think there is more to go for the longer date contracts,” SEB chief commodities analyst Bjarne Schieldrop said. “This will send very positive price signals into the whole oil space with higher confidence, optimism and evaluations as a likely consequence.”
Demand Surprise
There are several reasons for the sudden surge in forward prices. Oil consumption is expanding much faster than anticipated, adding growth in two years that would normally three. At the same, oil investment has dropped significantly over the past three years, particularly in projects that take longer to develop such as ultra-deep water offshore, raising doubts about future supply growth despite the gains in Texas, North Dakota and other U.S. shale regions.
Moreover, a change in marine fuel oil specifications by 2020, which should increase significantly the demand for diesel-like refined products, is further reinforcing the belief among some investors that the oil market will be tighter than expected in the future.
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The buying has sparked a rally in later-dated contracts in the past week and a half that traders say is even more impressive than Brent’s march past $80 a barrel. The grade for delivery in December 2022 has surged 10 percent since to beginning of the month to nearly $64 a barrel. The December 2023 has risen above $63 a barrel.
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